The In Duplum Rule – How much interest can a lender charge?

Credit is the ability of a customer to acquire goods or services before payment. The creditors, businesses or people that give credit, operate by charging interest on the credit given. The obvious risk that flows from this type of business is the debtor’s over-indebtedness. In the interest of public policy and equity, the law has developed a rule to protect debtors from over-indebtedness. This rule is known as the in duplum rule.

The in duplum rule states that interest on a debt will stop running when the total amount of the unpaid interest is equal to the outstanding principal debt. The rule was introduced to protect debtors against creditors who delay the recovery of their debt, in order to charge unreasonable amounts of interest for an indefinite period. The rule is therefore a protection mechanism for debtors who might otherwise be unable to defend themselves against the bargaining power of creditors by limiting the cost of credit. In addition, the rule encourages creditors to be more alert of debtors who do not service their debts and to exercise their rights to be repaid promptly.

In considering the application of the in duplum rule, the Court of Appeal in Afritec (Proprietary) Limited v. Letlhogonolo Bakae confirmed that interest on a debt stops running whenever the unpaid interest is equal to the unpaid capital. Additionally, the burden to prove that the in duplum rule has been followed in calculating a debt lies with the creditor. It is therefore important for creditors to clearly differentiate interest from capital whenever claiming any amount as due and owing. The Court further clarified that despite creditors describing interest as being ‘capitalised’ from time to time and combining it with the principal debt in their books, interest never loses its true character and remains categorised as interest for purposes of the in duplum rule. The Court further noted that in the absence of an agreement to the contrary, repayments by a debtor go first to the reduction of outstanding interest, thereafter the capital. As soon as the interest owed falls below the capital amount, the interest begins to run again. Once a court pronounces judgment on the debt, that is, capital plus?interest, those sums are combined and any interest awarded commences to run afresh on the total sum and subject to the in duplum rule.

It is important to note that the in duplum rule does not provide that interest claimed may not exceed the capital sum advanced as is often the case with long term loans. What the rule does provide is that interests stops running whenever unpaid interest is equal to unpaid capital.

Please do not hesitate to contact us at [email protected] or on +267 3975779 for any legal matters.

The information contained in this newsflash was intended for our clients and correct to the best of the authors knowledge at the time of publication. Before making any decision or taking any action, you should consult the contacts listed here.